When the changes in the updated monthly oil balance reports are scrutinised in light of the price movement, the picture that emerges implies a relatively relaxed, or even nonchalant, attitude towards the potential adverse impacts of the stand-off between the US and Iran around the Strait of Hormuz. When scanning through the latest dataset, one can only conclude, in awe, that oil prices should be significantly higher. There were massive bullish adjustments on the supply side of the equation and mildly bearish ones on the demand side. Any analyst worth her salt, however, is intellectually flexible enough to admit that she cannot be smarter than the entire oil fraternity; thus, she will start desperately seeking a possible explanation for the market behaviour.

In April, another month passed during which the Strait of Hormuz remained under a highly effective blockade, as neither Iran nor the US was willing to blink. As is frequently pointed out, around 20 mbpd of crude oil and oil products sail through this narrow waterway in times of peace. Alternative routes, such as the East-West Pipeline in Saudi Arabia or the Abu Dhabi Crude Oil Pipeline, which circumvents the strait, thankfully ease the pain, but, depending on which source one believes, it is fair to assume that around 10–13 million bbls of the black stuff is stranded daily in the Persian Gulf. Over two months, this equates to 600–780 million bbls, and by now the figure is close to 1 billion bbls.

The longer it takes for the situation to normalise, the greater the damage it will cause and the more protracted the recovery is expected to be. The monthly changes prove this point. The IEA expected 2Q OPEC+ crude supply to be 52.4 mbpd in February. This was revised down to 43.3 mbpd in April and by a further 3.3 mbpd to 40 mbpd this month. The downgrades for 3Q amount to 1.4 mbpd from February to April and 3.5 mbpd from April to May. Needless to say, further readjustments are anticipated if there is no progress towards reopening the Strait.

Naturally, Persian Gulf oil producers are the ones suffering the most. OPEC’s secondary sources put the combined crude oil output of Iraq, Kuwait, Saudi Arabia and the UAE at 20.3 mbpd in February, which fell to 12.46 mbpd in March and to 10.78 mbpd in April. These are massive losses that materially alter the global oil balance. On a side note, and admittedly, this is a rudimentary approach, income from petrodollars increased from February to March (using the monthly average OPEC basket price) and was only 15% below the February level in April, despite output nearly halving.

The demand outlook is not immune to developments in the Middle East and the resultant strength in oil prices. Although it is much more difficult to quantify than the destruction on the supply side, all three agencies felt it prudent to cut their estimates for the remainder of the year. For the 2Q–4Q period, the EIA revised demand down by 440,000 bpd, the IEA by 600,000 bpd and OPEC by 370,000 bpd. Predictions for the whole of 2026 are now the lowest on record. It is noteworthy that the significant chasm in absolute figures between the IEA and OPEC has not narrowed. For the above-mentioned period, OPEC puts demand at 106.43 mbpd, while the IEA estimates it at 103.93 mbpd.

We established that both supply and demand forecasts were lowered, with the former much more sharply than the latter. As a result, global oil inventories are expected to decline by between 6.2 mbpd and 8.47 mbpd in 2Q, and between 2 mbpd and 4.4 mbpd in 3Q. All three reports now anticipate an annual drawdown. As noted at the beginning of this note, these estimates will be revised even lower if the Strait of Hormuz remains shut in the coming weeks. The extent of global stock depletion could send OECD inventories to record lows in some cases, and, therefore, considerably higher oil prices would appear perfectly justified, according to statistical evidence.

So, is it complacency or the harbinger of easing tensions? One possible reason for the inertia is the remarkable adaptability of the oil market, helped by the somewhat readily available alternatives, such as coal, renewable energy and even biofuels. High inflation, as illustrated by elevated US consumer and producer prices, also suppresses the appetite for oil, especially if central banks refuse to cut rates, let alone raise them.

On the supply front, an increasing number of vessels are filtering through the Strait (30 yesterday, according to the Iranian semi-official Fars news agency), although currently this has a more tangible impact on sentiment than on the actual oil balance. Pre-crisis, around 140 ships transited the chokepoint. The SPR release, which the IEA estimates at 164 million bbls as of May 8, out of the 400 million bbls agreed on March 11, could also provide some cushion. Then there is a general belief that the stalemate will be resolved by June at the latest, because the US midterm elections are fast approaching.

Notwithstanding the current prognosis of horrifically low oil inventories, it appears that the focus is progressively shifting towards demand destruction, hence the reluctance to revisit the March or April summits. Of course, such a jump cannot be ruled out in the event of an escalation. After all, it is an unnecessary war that an oppressive regime views as existential, against an impulsive and vainglorious US president, who is, once again, losing patience with Iran. For now, nevertheless, the upside appears limited, particularly if China genuflects to US demands and puts pressure on Iran to lift the blockade. These remain uncertain times, though, with investors showing no signs of panic anymore, but rather biding their time.

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